Everything You Need To Know About Credit Scores and Business Loans
A complete guide to score requirements and how to boost your chances of getting funding
Any time you need to borrow money, whether applying for a credit card, home loan, or personal loan, lenders want to confirm that you’re a reasonable risk and will repay the debt. They do this by checking your credit history and score, revealing how well you’ve handled previous debts.
Borrowing money for a business loan is no different. Lenders check your credit score as part of the underwriting process, using it to determine whether you’re eligible to borrow money and the loan terms to offer. In some cases, lenders look at your personal and business credit scores to make their decision.
One of the most common questions business owners ask when considering a business loan is, “What is the minimum credit score necessary to qualify for a loan?” The answer varies by loan type, program, and lender, but overall, you’ll need a score of about 700 to secure a loan for your business.
Understanding credit scores and what they mean
A credit score is a way for a potential lender to gauge your risk as a borrower at a glance. Personal scores are three-digit numbers ranging from 300 to 850. The higher the score, the more likely you are to qualify for a loan or other credit, and the better the loan terms. For example, a score in the 700s or above can mean a smaller down payment and a smaller (or no) requirement for collateral.
Credit scores, also known as FICO scores, fluctuate, sometimes by several points or more, from month to month. That’s because the score calculation accounts for multiple factors, including:
- Your overall payment history (35% of the score)
- How much you owe (30% of the score)
- The length of your credit history (10% of the score)
- New credit (10% of the score)
- Credit mix (10% of the score)
As these factors change over time, they can add or subtract points from the score. For instance, if you apply for a new credit card, your score may temporarily decrease by a few points. However, your score will increase if you pay down an existing debt.
Credit scores are just one measure of your overall risk as a buyer and are part of an overall review of your creditworthiness when you apply for a business loan. Still, most lenders prefer applicants with a minimum score of 700, as that typically indicates a responsible use of credit and a lower risk that you’ll default on the loan.
Business Credit Scores
Lenders will evaluate your individual credit score and history when considering your loan application, but some also look at your business credit score. This score rates your company on some of the same factors, including its debt and payment history. It also considers your company’s size, age, and industry.
Business credit scores can range from 0 to 300. Lenders who use business credit scores typically require a score of at least 70 to consider your application. They can acquire this information from one of three reporting agencies (Dun & Bradstreet, Equifax, or Experian) or the FICO Small Business Scoring Service (SBSS), which calculates a score based on information gathered from the reporting agencies.
Common business loan programs and their credit score requirements
FICO credit scores fall into six categories ranging from poor to excellent. A good credit rating starts at 670, while very good and exceptional ratings start at 740 and 800, respectively.
Most business loan programs will only work with borrowers with a good credit rating. You can find funding sources for poor or fair credit with a score as low as 500, but you will pay significantly more to borrow money from those lenders via a higher interest rate, bigger down payment, and more collateral.
Programs with more stringent qualifications include the following:
SBA loans
The Small Business Administration does not lend money to entrepreneurs directly but connects them with banks and other lenders who can provide funding. Because the federal government partially backs these loans, they are lower risk, and therefore, lenders can work with business owners with lower credit scores, starting in the mid-600s.
The specific minimum credit scores for SBA loans depend on the program. SBA 7(a) loans typically require a score from 680 to 700, while you may be able to secure an SBA Express Loan with a score between 620 and 640. SBA 504 loans and lines of credit are available for borrowers with scores above 680, but over 700 is preferable.
Bank loans
Traditional bank loans tend to have the strictest requirements. In most cases, the minimum credit score is 700; a score over 740 is the minimum for the most favorable terms.
Commercial real estate loans
Getting a loan for commercial real estate requires a solid credit score. Most lenders will consider a minimum score of 680, but some only work with borrowers with scores well above 700.
Equipment loans
When you borrow money for business equipment, the equipment is collateral that the lender can repossess and sell to recoup their losses if you default. Therefore, they are generally more willing to take risks on borrowers with lower scores and may extend financing even if your score is in the 500s.
Business lines of credit
Getting a business line of credit from a bank usually requires a good or better credit score; the minimum score for approval may be as low as 670, but most banks prefer at least 700.
Keep in mind that these scores are simply averages, and every lender is different. A lower credit score does not automatically mean you’re out of luck when securing funding for your business. The number is simply one part of your overall application, and lenders may be willing to work with you when there are extenuating circumstances or if your application is strong in other areas.
How to improve your credit score to secure a business loan
Remember, credit scores change constantly, and there are some things you can do to gain points and increase your chances of being approved for a business loan. However, be wary of any service that claims to be able to “clean up” your credit report and instantly increase your score. No one can wave a magic wand and instantly get your score where you want it to be.
You can, however, make some positive changes to improve your credit standing.
- Scrutinize your report for errors and dispute incorrect information. A staggering number of credit reports include erroneous information, and correcting it can boost your score.
- Make payments on time. Paying bills on time every month is one of the best things you can do to keep your score high. If you have any past-due accounts, make it a priority to get current on them.
- Reduce your debt. Reducing your overall credit usage and the amount you owe on credit cards and loans can significantly improve your credit score. Having less debt also makes you more attractive to lenders and helps you get better loan terms.
- Keep unused accounts open. Closing old accounts reduces your available credit and increases your utilization ratio, so keep old or unused accounts open even after you pay them off.
- Only borrow what you need. Applying for and opening new accounts can shave points off your score, so refrain from opening new accounts you don’t need.
- Be patient. Sometimes, it can take a while for your score to show improvement. Keep paying your debts consistently and staying alert to changes on your credit report, and you’ll see improvement.
Secure the business funding you need with help from the Finance Factory
If you have a credit score of 700 or higher and need a loan to start or grow your small business, Finance Factory may be able to help. Our experienced advisors can help you explore your funding options and connect you with vetted lenders ready to help your business grow. We’re here to ensure you have all the information you need to make the best decisions and find the most affordable rates on business loans.
To get started, fill out our simple pre-qualification form; there’s no need to worry about a hard inquiry on your credit or any effect on your score. We’re happy to chat with you about your options and get you on track toward getting the money you need to take your business to the next level and make your vision a reality.
